nep-ifn New Economics Papers
on International Finance
Issue of 2013‒10‒02
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Gauging the Safehavenness of Currencies By Alfred Wong; Tom Fong
  2. Puzzling over the Anatomy of Crises: Liquidity and the Veil of Finance By Guillermo Calvo
  3. Demography and Low Frequency Capital Flows By David Backus; Thomas Cooley; Espen Henriksen
  4. Measuring return and volatility spillovers in euro area financial markets By Dimitrios P. Louzis
  5. The procyclicality of foreign bank lending: evidence from the global financial crisis By Ugo Albertazzi; Margherita Bottero

  1. By: Alfred Wong (Hong Kong Monetary Authority); Tom Fong (Hong Kong Monetary Authority)
    Abstract: This study assesses the 'safehavenness' of a number of currencies with a view to providing a better understanding of how capital flows tend to react to sharp increases in global risk aversion during periods of financial crisis. It focuses on how currencies are perceived by dollar-based international investors or, more specifically, whether they are seen as safe-haven or risky currencies. To assess the 'safehavenness' of a currency, we use a measure of risk reversal, which is the price difference between a call and put option of a currency. This measures how disproportionately market participants are willing to pay to hedge against appreciation or depreciation of the currency. The relationship between the risk reversal of a currency and global risk aversion is estimated by means of both parametric and non-parametric regressions which allow us to capture the relationship in times of extreme adversity, i.e., tail risk. Our empirical results suggest that the Japanese yen and, to a lesser extent, the Hong Kong dollar are the only safe haven currencies under stressful conditions out of 34 currencies vis-a-vis the US dollar.
    Keywords: Safe Haven Currency, Risk Reversal, Quantile Regression, Mixture Vector Autoregressive Models, Tail Risk, Crash Risk
    Date: 2013–09
  2. By: Guillermo Calvo (Columbia University and NBER (E-mail:
    Abstract: The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not there to adequately trim its branches to keep it from toppling by its own weight or minor wind gusts. The issues raised in the paper are not entirely new but have been ignored in conventional theory. This is very strange because disregard for these key issues has lasted for more than half a century. Are we destined to keep on making the same mistake? The paper argues that a way to prevent that is to understand its roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to Sudden Stop, which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (a) why a credit boom may precede financial crisis, (b) why capital inflows grow in the run-up of balance-of-payments crises, and (c) why gross flows are pro-cyclical.
    Keywords: Financial Crises, Bubbles, Sudden Stop
    JEL: E32 E65 F32
    Date: 2013–09
  3. By: David Backus; Thomas Cooley; Espen Henriksen
    Abstract: We consider the causes of international capital flows. Since capital flows are extremely persistent, we argue that their drivers must be persistent, too. We think the most compelling candidates are demographic trends, tfp differences and financial frictions. In this paper we focus primarily on the role of demography in a multi-country overlapping generations model in which saving decisions are tied to agents' life expectancy. Capital flows reflect differences between saving and investment across countries. Demographic changes affect the aggregate accumulation of assets in two ways: by changing life expectancy which changes individual household saving behavior, and by changing the age distribution of the population by which individual household decisions are aggregated. The most important drivers turn out to be increases in life expectancy caused by decreases in adult mortality.We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.
    JEL: J11
    Date: 2013–09
  4. By: Dimitrios P. Louzis (Bank of Greece)
    Abstract: This study examines the return (price) and volatility spillovers among the money, stock, foreign exchange and bond markets of the euro area, utilizing the forecast-error variance decomposition framework of a generalized VAR model proposed by Diebold and Yilmaz (2012) [Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 23, 57-66]. Our empirical results, based on a data set covering a twelve-year period (2000-2012), suggest a high level of total return and volatility spillover effects throughout the sample, indicating that, on average, more than the 50% of the forecast-error variance of the respective VAR model is explained by spillover effects. Moreover, the stock market is identified as the main transmitter of both return and volatility spillovers even during the current sovereign debt crisis. With the exception of the period 2011-2012, bonds of the periphery countries under financial support mechanisms are receivers of return spillovers, whereas, they transmit volatility spillovers to other markets diachronically. Finally, we identify the key role of money market in volatility transmission in the euro area during the outbreak of the global financial crisis.
    Keywords: Asset markets; Spillovers; Vector Autoregressive; Euro area; Financial Crisis.
    JEL: G01 G10 G20 C53
    Date: 2013–03
  5. By: Ugo Albertazzi (Bank of Italy); Margherita Bottero (Bank of Italy)
    Abstract: We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.
    Keywords: foreign banks, credit crunch, bank balance sheet channel, functional distance
    JEL: E44 G15 G14 G21
    Date: 2013–07

This nep-ifn issue is ©2013 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.